Daily Market Reports | Jun 19 2015
By Greg Peel
The Dow closed up 180 points or 1.0% while the S&P rose 1.0% to 2121 and the Nasdaq gained 1.3%.
Volatility
The interesting aspect to yesterday’s plunge in the ASX200 can be highlighted with hindsight, knowing that Wall Street rallied so strongly last night. While there is some confusion over news coming out of Europe this morning regarding Greece, the bottom line is Wall Street rallied last night as a next-day response (the big moves usually come the next day) to Wednesday night’s Fed statement and press conference, which implied to most that a September rate rise is no longer a given.
In other words, Bridge Street did not tumble yesterday because of the Fed. One might argue that Bridge Street tumbled due to the increasing risk of a Greek default, but if that were the case, why did we rally a percent on Wednesday? Nothing changed in between.
Hence we must assume the percent up-percent down moves the past two sessions were domestically driven. So, what changed from one day to the next? The banks, most notably, were darlings on Wednesday and pariahs on Thursday. Perhaps an explanation can be given by yesterday’s expiry of the June SPI futures contract and ASX index options – instruments used by large funds managers as hedging tools and others as speculative replicants.
It has been a horrendous two days for option market makers – those proprietary traders who are typically net sellers of calls and puts. As expiry approaches, each little move up or down in the index forces short option holders to buy going up and sell going down to ensure their risks are hedged. This necessity becomes even more self-defeating the act of buying pushes the index higher, requiring more buying, and vice versa on the downside.
Now we have the Dow up 180 points and the SPI Overnight – the new September front month – up 39 points. If Thursday cancelled out Wednesday and expiry is now over and done with, what happens from here should be more “real”. Mind you, we are about to head into the last week of trading before the end of the financial year, and that can also bring its own volatility.
Greek Drama
It wouldn’t be a good Greek drama without unconfirmed reports, denials, rumours and speculation, and last night saw plenty going on.
It is important to first appreciate that June 30 represents two critical events for Greece. One is the repayment date of its bundled IMF payments which if missed, sends Greece into default, and the other is the expiry of the current bailout tranche and potential payment date for the next tranche. It is assumed Greece cannot afford to repay the IMF unless it receives the next bailout tranche.
Why not just net them out then, I hear you think. Well the granting of the next bailout tranche is incumbent upon Greece agreeing to further austerity reforms, which it refuses to do.
As the eurozone finance ministers met in Luxembourg last night, a German newspaper reported, after the close of European trade but around mid-session on Wall Street, that the European Commission and ECB were considering breaking from the IMF to provide Greece with an extension of credit out to the end of the year. If this is the case, Greece could pay the IMF and avoid default, leaving more time for Greece to sort itself out and for negotiations to continue.
And we could then all be bored witless by Grexit talk right through to Christmas.
An already strong Wall Street popped further on this news, but it was quickly denied by the Germans. Christine Lagarde also made the point that there would be no extension granted for Greece to pay its IMF obligations. When the ministers emerged from the meeting, they did so with no deal of any sort having been achieved.
Then it got interesting. Reuters reported an overheard conversation in which one attendee was asked “Will Greece need to close its banks tomorrow [tonight]?” to which the response was “No not tomorrow, Monday”. We recall also that the ECB has been keeping the Greek banks, as opposed to the Greek government, on a separate liquidity drip to prevent their collapse while the credit negotiations have continued.
With all the talk of a Grexit being more likely, what had been a “walk” on Greek banks before this week has become more of a “trot” this week. The chances are, tonight that trot could become a fully blown run, forcing the banks to pull down their shutters over the weekend.
What we do know for certain is that the EU leaders’ meeting scheduled for later next week in Brussels has now been hastily brought forward to Monday. This would suggest it has become a crisis meeting with regard how to deal with a Grexit. The fact this meeting has been rescheduled is only more incentive for Greeks to try and get their euros out of the Greek banks tonight. The ECB could well shut off the tap next week.
Getting their euros out is one thing, but if currency controls are implemented, they may yet be subject to massive devaluation into drachma, unless they can be taken across the border. Look for Greece’s border crossings to be armed.
Or a deal will be reached. Chances? Well, a lot of people in the market still believe this is the only outcome, and clearly that would require capitulation from the lenders given the Greek government appears to be stubbornly defiant. But what message would that send to the rest of the eurozone periphery?
Who Cares?
If a deal is, by some miracle, reached, that would be positive for markets. If a Grexit occurs, is that negative? The common assumption is yes, for about five minutes. Then it becomes a positive, because the whole sordid, frustrating story will be over. The greatest enemy of markets is uncertainty.
This appears to be the way Wall Street was taking it last night. As the news out of Europe turned negative during the afternoon, Wall Street shrugged. The Nasdaq hit a new all-time high, as did the Russell 2000 small-cap index. The Dow and S&P held onto the bulk of their earlier gains.
Those gains represent a shift in expectation, in the wake of what was considered a dovish Fed statement and press conference, from a September first rate rise to a December first rate rise.
Such a view is supported by a 0.2% fall in the US dollar index to 94.04, and a sudden US$16.80 jump for gold to US$1202.00/oz. Or is gold jumping ahead of a Grexit? Doesn’t matter, it’s simply stuck at 1200 again.
But just to throw the spanner in the works, the US ten-year bond yield rose 5 basis points last night to 2.35%.
Commodities
It was the first chance for the LME to respond to the Fed last night, Greece notwithstanding, and nothing happened. Moves were inconsequential except for tin, which popped 3%.
Iron ore is unchanged at US$60.90/bbl.
The oils are a little stronger, with West Texas up US68c to US$60.49 and Brent up US47c to US$64.24//bl.
Today
As noted, the SPI Overnight closed up 39 points or 0.7%. The Aussie is 0.5% stronger at US$0.7798.
The Bank of Japan will hold a policy meeting tonight, although nothing new is expected.
Tonight is quadruple witching in the US, which involves the same type of index and option expiries the ASX saw yesterday. There is a suggestion last night’s big moves up on Wall Street may also have lent themselves to some expiry influence.
Locally, the quarterly promotions/relegations of stocks in the S&P/ASX indices come into effect this morning.
And unless he was bluffing, Alexis Tsipras meets with Vladimir Putin tonight.
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